P&I Clubs Strong But Pricing Under Pressure

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Balance sheets of clubs operating in the marine protection and indemnity (P&I) sector are generally strong, bolstered by several years of positive earnings but underwriting discipline will be tested over the February 2018 renewal period, according to a new report by A.M. Best.

The Best’s Special Report, “Balance Sheets of P&I Clubs Strong But Pricing Under Pressure Amid Strong Competition” states that ahead of the Feb. 20, 2018 renewal deadline, pressure from members and brokers to reduce rates is growing. Competition is intense, exacerbated by a growing fixed-premium market.

Catherine Thomas, senior director, analytics, said: “Historically, clubs were able to use investment income, not only to enhance free reserves, but also to offset underwriting losses. However, in recent years, this strategy has been challenged by changing regulation and an investment environment characterised by low interest rates and volatile equity markets. Consequently, there has been a greater focus on underwriting performance, and most clubs have increased rates, introduced minimum deductibles and expanded deductible levels in order to achieve breakeven technical results.”

The report states that, over the year ahead, performance is likely to be adversely affected by downward pressure on rates. It adds in general, the average cost of claims continues to grow due to a number of factors, including higher liability limits, an increase in the size of ships and stricter liability regimes.

By way of contrast, A.M. Best has noted that the frequency of attritional claims has trended down in recent years.

Increased use of deductibles by clubs is likely to have had an impact on both the average cost of claims and claims frequency.

Filippo Novella, associate financial analyst, said: “A slowdown in world trade has led to fewer voyages by ships, smaller cargo volumes and less competition for experienced crews, all of which would be expected to reduce the number of claims. Additionally, longer-term trends such as improved risk management practices, more stringent regulation, a fall in the age profile of vessels and technological advances in navigation are likely to have reduced claims frequency. However, as the global economy recovers, the number of loss events could increase, and pricing decisions made now should reflect the prospect of higher claims frequency, as well as claims inflation.”

The report also states that improved underwriting performances in recent years have increased free reserves and strengthened the sector’s overall risk-adjusted capitalisation.

However, the prospect of modest investment returns due to the prevailing low interest rate environment means that clubs must achieve close to break-even technical results if current levels of free reserves are to be maintained. This will be difficult to achieve given the competitive pressure on premium rates and challenging claims environment, characterised by volatile loss experience and inflationary pressure on the cost of claims.

Nevertheless, there is a buffer in current levels of capitalisation to absorb the potential impact of these challenges on performance and free reserves.